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Sri Lanka core inflation rise to 4.2-pct, a two year high

ECONOMYNEXT – Sri Lanka’s core inflation rose to a 26-month of 4.2 percent in September 2015, up from 3.9 percent in August, as headlines inflation remained muted with commodity prices falling amid a stronger US dollar.

Sri Lanka’s core inflation is now the highest since 4.3 percent hit in June 2013. Sri Lanka’s core and headline inflation rose sharply over 2012 and early 2013 as the price structure in the island altered in the wake of a currency collapse in 2012.

Core-inflation which excludes food and energy is watched by central bank as a guidance for monetary policy. In the past rate hikes have been delayed in Sri Lanka citing lower core inflation.

Core inflation has earned criticism in the US in particular as having contributed to the 2008 credit bubble and bank run.

Though small countries like Sri Lanka cannot influence the price of traded commodities like oil, weakness in the US dollar pushes up global commodity prices, and ignoring their effect can allow imbalances to build up and worsen credit expansion.

Todd Schneider, head of mission to Sri Lanka had raised concerns about rising core inflation.

In the 12-months to September 2015, headline inflation fell 0.3 percent, for the second month running with the broader index falling to 181.4 from 181.9.

In February the index fell sharply from 183.2 to 178.9 after a newly elected administration cut prices of traded goods including fuel. However an expanding budget deficit was then financed by domestic credit.

Sri Lanka’s expanding credit and financing of the budget by the banking system has already triggered balance of payments pressure. (Colombo/Oct01/2015)

 

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